Archive for May 14th, 2011

Short Selling or Foreclosing: Which is a better Deal?

Question: Does it make sense to short sell my home or should I let it go into foreclosure?

Answer: Many homeowners who are having delays in their mortgage payments are worried of its impact on their credit score. But what is the difference in the impact on credit score between short selling and foreclosing a home?

FICO, the producer of the widely used credit score says that many regulators, lenders, loan servicers and consumer advisers working with mortgage related issues are always asking this question.
To be able to answer these questions and get rid of known myths, the company examined the impact of foreclosing and short selling mortgage scenarios on individuals with poor, good and excellent credit standing.

Short selling a home occurs when a homeowner finds a home buyer to purchase the property at a lesser price compared to what it owes. On the other hand, foreclosure involves surrendering the house in an attempt to get one’s money back.

In cases of short selling a home, a common misconception is that this is a better option compared to a foreclosure. However, the truth is, both situations impact the credit score equally. The reason for this is that, in both cases, the lender receives a lesser amount compared to the loan that is owed. Thus, both are considered as default.

Short selling and foreclosures may not differ in terms of the decline it can cause to the credit score. However, the absolute value of the score reduction may vary depending on the original score of the individual. FICO scores have values of 350 to 850; the higher the credit score, the better. Specifically, 680 is low, 720 is satisfactory and 780 is good.

If an individual’s score is higher before short selling or foreclosing a property, the decline in score is bigger than individuals with low scores to begin with. Poor credit scores may be further reduced to 85 to 105 points. Mid scores can decline by 130 to 150 points. High credit scoring individuals may end up with a minus 140 to 160 credit score mark.

Aside from differences in the effect of foreclosure and short selling in the absolute value of a credit score, there are cases when short selling may lead to less damaging effects compared to foreclosures. This happens when lenders do not report the specific amount of unpaid debt by the borrower. It is the role of the lenders to send all the possible information to credit agencies before a credit score of an individual is made. Missing out some information can result to a plus 35 points in the score after a short sale than after a foreclosure according to FICO.

Both short sale and foreclosure of a home negatively impacts the credit score. The only difference is that their absolute effect on the value of the score differs. However, whichever option is taken, it is worthy to take note that none of the two can do the credit score any good. Hence, if both can be avoided, then do so.